Market Entry Strategies BA 523 International Marketing Melike Demirbag Kaplan, PhD

Deciding Whether to Go Global Factors to consider Can the company understand the consumers Can it offer competitively attractive products Will it be able to adapt to local culture Can they deal with foreign nationals Do the company’s managers have the experience Has management considered regulation and political environment of other countries

Deciding Which Markets to Enter Define international marketing objectives and policies Foreign sales volume How many countries to market to Types of countries to market to based on: Geography Income and population Political climate Note to Instructor When choosing the number of countries, companies must be careful not to spread themselves too thin or to expand beyond their capabilities by operating in too many countries too soon.

Deciding Which Markets to Enter Rank potential global markets based on: Market size Market growth Cost of doing business Competitive advantage Risk level Note to Instructor There is an interesting case in the text: Just 10 years ago, Procter & Gamble’s Crest brand was unknown to China’s population, most of whom seldom—if ever—brushed their teeth,” says one analyst. “Now P&G…sells more tubes of toothpaste there than it does in America, where Crest has been on store shelves for 52 years.” P&G achieved this by sending researchers to get a feel for what urban and rural Chinese were willing to spend and what flavors they preferred. It discovered that urban Chinese are happy to pay more than $1 dollar for tubes of Crest with exotic flavors such as Icy Mountain Spring and Morning Lotus Fragrance. But Chinese living the countryside prefer the 50 cents Crest Salt White, since many rural Chinese believe that salt whitens the teeth. Armed with such insights, Crest now leads all competitors in China with a 25 percent market share.

Deciding Which Markets to Enter The Uppsala intenationalization model (U-Model) Innovation related internationalization models (I-Models) Born Globals Note to Instructor When choosing the number of countries, companies must be careful not to spread themselves too thin or to expand beyond their capabilities by operating in too many countries too soon.

The Uppsala Model A theory that explains how firms gradually intensify their activities in foreign markets Firms first gain experience from the domestic market before they move to foreign markets Firms start their foreign operations from culturally and/or geographically close countries and move gradually to culturally and geographically more distant countries Firms start their foreign operations by using traditional exports and gradually move to using more intensive and demanding operation modes Note to Instructor When choosing the number of countries, companies must be careful not to spread themselves too thin or to expand beyond their capabilities by operating in too many countries too soon.

U-Model (Johanson and Wiedersheim-Paul, 1975) Stage 1: No regular export activites. Stage 2: Export via independent representatives (agents). Stage 3: Establishment of an overseas sales subsidiary. Stage 4: Overseas production/manufacturing units.

Note to Instructor Ways to enter global markets include: Exporting Joint venturing Direct investment It is important that a company truly understands who they are working with if they partner for their global markets. Even finding an exporting agent can be quite difficult. This link brings the instructor to the USDA Foreign Agricultural Service listing of types of export agents and their focus.

Deciding How to Enter the Market Exporting is when the company produces its goods in the home country and sells them in a foreign market. It is the simplest means involving the least change in the company’s product lines, organization, investments, or mission. Indirect exporting Direct exporting Note to Instructor Indirect exporting is when the firm works through an independent international marketing intermediary. This requires less investment and risk since the firm does not require an overseas organization or network. Direct exporting is when the firm handles its own exports. This requires a greater investment and risk.

Deciding How to Enter the Market Joint venturing is when a firm joins with foreign companies to produce or market products or services Licensing Contract manufacturing Management contracting Joint ownership Joint venturing differs from exporting in that the company joins with a host country partner to sell or market abroad

Deciding How to Enter the Market Licensing is when a firm enters into an agreement with a licensee in a foreign market. For a fee or royalty, the licensee buys the right to use the company’s process, trademark, patent, trade secret, or other item of value. Toyoko’s Disneyland Resort is operated under a licensing agreement.

Deciding How to Enter the Market Contract manufacturing is when a firm contracts with manufacturers in the foreign market to produce its product or provide its service. Benefits include faster startup, less risk, and the opportunity to form a partnership or to buy out the local manufacturer (Form of outsourcing, common in medical and electronics industry)

Contract Manufacturing vs. Licensing Contracting maintains your complete ownership of the product. You simply agree on a price for manufacturing the product, and the manufacturer delivers the number of units you request. You will pay cash upfront for this. Licensing If you need a large number of units, you should consider licensing. This arrangement puts all the risk on the manufacturer. Under a licensing agreement, you agree to let a manufacturer make as many copies of your product as it can, and you get paid a licensing fee. The manufacturer will expect to make money on the product as well.

Deciding How to Enter the Market Management contracting is when the domestic firm supplies management skill to a foreign company that supplies capital. The domestic firm is exporting management services rather than products. Joint ownership is when one company joins forces with foreign investors to create a local business in which they share joint ownership and control. Joint ownership is sometimes required for economic or political reasons.

Copyright 2007, Prentice-Hall Inc. Joint Ownership KFC entered Japan through a joint ownership agreement with Japanese conglomerate Mitsubishi. Copyright 2007, Prentice-Hall Inc.

Deciding How to Enter the Market Direct investment is the development of foreign-based assembly or manufacturing facilities and offers a number of advantages including Labor Logistics Control Government incentives Lower costs Raw material

Innovation-Related Internationalization Model Focuses on Small and Medium Sized Enterprises (SMEs) Only investigates firms’ internationalization through export behavior (not investment) Emphasizes the learning process but treating it as innovation. That is to say, it considers internationalization as an innovation to a firm (Bilkey and Tesar, 1977; Cavusgil,1980; Reid, 1981).

The I-Models (Bilkey and Tesar, 1977) Management is not interested in exporting Management is willing to fill unsolicited orders, but makes no effort to explore the feasibility of exporting Management actively explores the feasibility of active exporting The firm exports on an experimental basis to some psychologically close countries The firm is an experienced exporter to that country and adjusts export optimally to changing exchange rates and tariffs Management explores the feasibility of exporting to additional countries that psychologically further away.

The I-Models (Cavusgil, 1980) Domestic marketing: the firms only sell to home market Pre-export stage: the firms search for information and evaluate the feasibility of undertaking exporting Experimental involvement: the firms start export on a limited basis to some psychologically close countries Active involvement: exporting to more new countries, direct exporting and increased sales volume Commitment involvement: management constantly makes choices in allocating limited resource between domestic and foreign markets

Born Globals (Oviattand McDougall, 1994) Firms that “adopt an international or even global approach right from their birth or very shortly thereafter” (Madsen & Servais, 1997) Compete in niche markets, are very flexible and move fast Small is beautiful Gradual internationalization is dead

Born Globals Start international operations even before or simultaneously with domestic operations Base their visions and missions mainly on global markets and customers from inception Plan their products, structures, systems and finance on global basis Grow exceptionally fast on global markets Plan to become global market leaders as part of their vision

Distinctive Features of Born Globals Highly active in international markets from or near founding Characterized by limited financial and tangible resources Found across most industries Managers have a strong international outlook and international entrepreneurial orientation Often emphasize differentiation strategy Often emphasize superior product quality Leverage advanced communications and information technologies Typically use external, independent intermediaries for distribution in foreign markets

Examples History and Heraldry is a company in England that specializes in gifts for history buffs and those with English ancestry. Within a few years after the firm’s founding, History and Heraldry was selling its products in 60 countries, with exports generating about 70% of total production. Cosmos Corporation, Inc., is a young company in the United States that makes binoculars, telescopes, and various other optical devices. Within a few years of its founding, Cosmos began selling its products in Europe and Japan. Soon after that, the firm had expanded its sales to some 28 countries around the world. T-box from Istanbul, founded in 2003 and expanded its sales to 20 countries in 2005, totaling to 13 million US dollars.